Hospitality Industry Managerial Accounting HRT 374

1
Hospitality Industry Managerial AccountingHRT 374

• Chapter 5
• Ratio Analysis

2
Standards

• Prior period
• Industry averages
• Budgeted ratios

3
Purposes

• Management measures progress towards goals
• Creditors evaluate solvency
• Investors evaluate performance

4
Liquidity

• Current ratio
• Acid-test ratio
• Operating cash flows to current liabilities
• Accounts receivable turnover
• Average collection period

5
Current ratio

• Current Assets / Current Liabilities
• Example CA 338,000 CL 214,000
• What is current ratio?
• 1.58
• What does it mean?

6
Acid-test ratio

• Cash Market Sec N R A R /Cur Liabilities
• What accounts are missing from current ratio?
• Prepaid expenses and inventories
• Why would you use the acid test as opposed to the
  current ratio?
• Is there a big difference between acid test and
  current ratio in the hospitality industry?
• Why?

7
Operating cash flows to current liabilities

• Operating Cash Flows / Avg Current Liabilities
• Example
• 179,200 / (192,000 214,000)/2
• .88
• What does this mean?

8
Accounts receivable turnover

• Revenue / Avg Accts Rec
• 11.7 times
• What does this mean?
• Total revenue is 11.7 times higher than the
  accounts receivables or/and
• It means that the turnover is about once per
  month

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Average collection period (Days Sales
Outstanding) (DSO)

• 365 days / Accts Rec Turnover
• 365 / 11.7
• 31 days

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Solvency

• Solvency
• Debt-Equity
• Long term Debt to total capitalization
• Number of times interest earned
• Fixed charge coverage
• Operating cash flows to total liabilities

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Solvency
Total Assets ____________ Total Liabilities
12
Debt-Equity

• Total Liabilities / Owners Equity
• 659,000 / 517,300
• 1.27
• What does it mean?
• For each 1 of OE, the company owes 1.27

13
Number of times interest earned

• EBIT (Earnings b4 int and taxes) / Int Exp
• 304,500 / 60,000
• 5.1

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Operating cash flows to total liabilities
Operating Cash Flows ___________________ Average
Total Liabilities
15
Activity

• Inventory turnover
• Asset turnover
• Paid occupancy percentage
• Average occupancy per room
• Multiple occupancy
• Seat turnover

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Inventory turnover

• Cost of Food Used / Avg Food Inventory
• 122,000 / 10,000 12.2
• What does it mean?
• Basically, turned over 12.2 times during the year
  OR about once per month

17
Asset turnover

• Revenues / Avg Total Assets
• 1,352,000 / 1,120,650
• 1.2 times
• What does it mean?

18
Paid occupancy percentage

• Paid Rooms Occupied / Rooms Available
• 21,000 / 29,200 71.9

19
Average occupancy per room

• Number of guests / Number of Rooms Occupied
• 24,160 / 21,160 1.14 guests

20
Seat turnover

• Covers / Number of seats x number of days open
• 56,000 / 100 x 365 1.5 times

21
Profitability

• Profit margin
• Operating efficiency
• Return on assets
• Return on owners equity
• Earnings per share
• Price/earnings

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Profit margin (ROS)
Net Income ____________ Total Revenue
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Operating efficiency

• Inc after Undistributed Operating Expenses /
  Total Revenue
• 415,000 / 1,352,000
• 30.7
• What does this mean?
• 30.7 cents is available to pay fixed expenses,
  income taxes and profit

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Return on assets (ROA)
Net Income _________________ Average Total Assets
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Return on owners equity (ROE)

• Net Income / Avg Owners Equity
• 146,000 / 468,650 31.3
• What does it mean?
• For every 1 of OE, 31 cents was earned

26
Earnings per share (EPS)

• Net Income / Avg number Common Shares outstanding
• 146,700 / 55,000
• 2.67 per share

27
Price/earnings (PE ratio)

• Market Price per share / Earnings per share
• 25 / 2.67 9.3

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Operating

• Mix of sales
• Average room rate
• Revenue per available room
• Revenue per available customer
• Average food service check
• Food cost percentage
• Beverage cost percentage
• Labor cost percentage

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Mix of sales
Beverage Sales _____________ Total Revenue
Room Sales ____________ Total Revenue
Telephone Revenue ________________ Total Revenue
Food Sales ____________ Total Revenue
30
Average room rate (ADR)
Rooms Revenue ___________________ Number of
Rooms Sold
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Revenue per available room (RevPAR)
Rooms Revenue _____________ Rooms Available
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Revenue per available customer (RevPAC)
Total Revenue from hotel guests __________________
_________ Total number of guests
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Average food service check
Total Food Revenue ___________________ Number of
food covers
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Food cost percentage
Cost of Food Sold _______________ Food Sales
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Beverage cost percentage
Cost of Beverages Sold ___________________ Bevera
ge Sales
36
Labor cost percentage
Total Labor Costs ______________ Total Revenue
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Limitations Usefulness

• Limitations
• Only indicators
• Do not resolve problems
• Inflation
• Watch accounting principles

• Usefulness
• For GMs
• OAPLS
• For Corporate
• POSLA
• For Owners
• PSLAO
• For Bankers
• SPLOA

Liquidity Solvency Activity Profitability Operati
ng
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Homework

• Problems
• 1
• 5 (part A 1-3 Part B C)
• 7
• 12 (all except 4)

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Problem 1 Ch.5

• Total CA Wk Cap Current
  Ratio
• 0 0
  0
• 
  
• -- 0
  0
• 0 0
  0
• -- 0
  0
• -- --
  --
• 0 0
  0
• 0 0
  0
• -- --
  --
• -- 0
  0

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Problem 5

• Part A 1. Paid Occ
• Paid rooms / Avail rooms
• 2,600 / (100 x 31) 83.9
• 2. ADR
• Room revenue / number of rooms sold
• 222,720 / 2,560 87.00

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3.3 What is RevPar?

• Paid Occ x ADR
• 1st Occ Paid rooms occupied / available rooms
• 2,600 / 3,100 83.9
• 2nd ADR rooms revenue / of rooms sold
• 221,000 / 2,600 85.00
• 3rd RevPar Occ x ADR
• RevPar 83.9 x 85
• RevPar 71.29

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• Part B
• 1. Food cost
• BI 12,000
• P 160,000
• Emp meals -5,000
• EI -14,000
• COGS 153,000
• COGS / Sales 153,000 / 480,000 31.9
• 2. Food inv T/O COGS / Avg Inv 153,000 / 13,000
  11.8 times
• Part C comments

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Problem 7

• 1. Avg Rec T/O
• Revenue / Avg Accts Rec
• 2,000,000 / 90,000 22.2 times
• 2. Food cost
• 575,000 / 2,000,000 28.8

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3 Inventory Turnover

• Cost of Food Used / Avg Food Inventory
• 1st Cost of food used
• BI P EI COS then minus employee meals
• 50,000 600,000 40,000610,000
• 610,000 25,000 585,000
• 2nd Avg Food Inventory
• 2003 50,000 2004 40,000 90,000 / 2 45,000
• 3rd Cost of food used / Avg Food Inventory
• 585,000 / 45,000 13 times

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Problem 9

• 1. Quick assets 80,000
• 2. Total sales 1,200,000
• A/R x A/R T/O Total credit sales
• Total credit sales 50 of total sales (note 1)
• 5. Paid Occ
• Number of rms not avail in June 2 x 30 60
• (200 x 30) 60 5,940 rooms avail in June

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Problem 12

• 1. Current Ratio
• CA / CL 200,000 / 210,000 .95
• 2. Acid Test
• Quick assets / CL 195,000 / 210,000 .93
• 3. Debt to Equity Ratio
• Total L / Total OE 330,000 / 310,000 1.06
• 5. Op efficiency ratio
• Inc after Und Op Exp 375,000 / 1,500,000 25.0

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Problem 12 continued

• 6. profit margin 65,100 / 1,500,000 4.3
• 7. Return on OE
• Net income / Avg OE
• 65,100 / 277,450 23.5
• 8. Return on Total Assets
• Net Income / Avg Total Assets
• 65,100 / 640,000 10.2